When it comes to outsourcing production and manufacturing, there are many challenges that global management companies face. Strategically, the companies must justify outsourcing manufacturing. They do this by noting the lowered cost of production overseas, which then lowers the wholesale and retail cost of the product. However, the justification of lowered costs leads to other problems.

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First, there is the problem of underpayment. Companies like Nike are hiring contractual manufacturers who seek to keep their costs low as well. While the living wage overseas is significantly less than it is in the United States, these contractual manufacturing companies often pay their workers around half of a living wage. This is a huge ethical, legal, and cultural dilemma, because these companies are located in areas overseas that are so impoverished that the workers are willing to work for lower wages in order to have any money at all.

Another ethical challenge is the fact that these contractual companies are not often named in the media, so they have have little motivation to treat their workers with the respect human beings deserve. Often these contractual companies hire workers that are too young, force workers to work more hours than they are legally allowed to by the countries in which they are located, and force workers to work in unpleasant and even dangerous working conditions. Both refusing workers’ rights and dignity and paying them below living wages allows the factories to keep their costs lower, and therefore keep Nike’s costs lower.

This presents an operational challenge: how do the companies like Nike step in to confront these ethical, legal, and cultural problems, without losing profits? Nike chose to hire auditors to investigate the claims that their contractual manufacturing companies were not treating their workers with dignity or paying their workers an appropriate amount. The problem with this though is that the auditors were not prepared to make a truly critical observation of the conditions in the factories. They also did not observe the conditions for long enough to truly know their quality.

This caused some cultural issues in America, because civil rights groups, including many schools that have licensing deals with Nike, were not satisfied with the audits that Nike performed. To combat these problems Nike formed a task force with various members of the American government, other retailers, and schools, which was called the Fair Labor Association. They created measures for auditing these contractual companies and factories which were uniform and, unfortunately predictable.

This created another operational challenge. Because the audits were predictable the companies could and did easily outwit the auditors. They made sure that their conditions were positive when the auditors came because they knew it would only happen once a year. Again, there was cultural backlash at this, and civil rights advocacy groups formed an independent auditing commission from the FLA, known as the Worker’s Rights Consortium.
The American government has not had very much input into the issue, despite the formation of a “presidential” task force to raise the working conditions in these outsourced factories. In fact, Nike itself took the reigns on raising the conditions in response to the negative press that human rights advocacy groups provided. Because the factories are overseas, the American government has no control over their operations. The governments of the countries where the factories are located have laws and regulations, such as minimum ages that workers can be employed, and minimum wages that they can be paid, and maximum hours that they can work in one month. However, those governments seem to be fairly hands-off as well. If they enforced these regulations then Nike would not have these problems to deal with.